Stronger institutions seen as buffer against global uncertainty
A Conversation analysis argues that countries with trusted, inclusive institutions are better placed to absorb shocks that cannot be predicted or priced.
By Tom Brennan · Health & Medicine Correspondent
3 min read
Governments face an era in which many shocks cannot be forecast with useful precision, and a new analysis argues that institutional strength is becoming a central economic defense. Odysseas Konstantinakos, writing in The Conversation, says societies with trusted and inclusive public systems are better able to withstand uncertainty than those relying on emergency fixes.
Konstantinakos points to the IMF’s World Uncertainty Index, which tracks references to uncertainty in economic and political reporting across 143 countries. He says the index has stayed high for much of the past decade, with new increases after major disruptions.
The analysis draws a sharp line between risk and uncertainty. Risk describes events whose probabilities can be estimated, such as losses that insurers can price across a large pool. Uncertainty, in the tradition of economist Frank Knight’s 1921 work, covers situations where the odds themselves cannot be calculated.
Konstantinakos says pandemics, wars, supply-chain breakdowns and climate shocks fall into that harder category. Standard macroeconomic models, he argues, rely heavily on assumptions about rational behavior and past data, leaving them poorly suited to events with cascading effects.
He cites examples including possible disruption in the Strait of Hormuz affecting agriculture across several continents through fertilizer shortages. He also notes that Europe’s gas price shock helped accelerate inflation in countries with little direct reliance on Russian imports.
The analysis is critical of market behavior that treats uncertain futures as though they can be neatly priced. Konstantinakos says U.S. equities have become more detached from the real economy and are being lifted in part by large bets on artificial intelligence, including expectations around companies such as OpenAI, Anthropic and SpaceX.
His central argument is that money can buy time after a crisis, but it cannot substitute for preparation. Germany, he writes, absorbed part of the 2022 energy shock through a €200 billion defensive package and purchases of liquefied natural gas, but not every country had similar fiscal capacity.
Denmark offers a different model, according to the analysis. After the 1973 oil shock exposed its reliance on imported fossil fuels, Danish governments built energy policy around long-term planning, wind power, industrial policy, research and broad political agreement.
Konstantinakos says Denmark now gets around half of its electricity from wind, with renewables supplying 67% of electricity overall. That structure left the country better placed when the 2022 energy crisis hit, he argues.
Spain’s pandemic labor response is presented as another example of institutional capacity. Konstantinakos says the Spanish government used the COVID-19 crisis to expand unemployment protections in cooperation with social partners, addressing long-standing exposure among precarious workers.
At the European Union level, he points to the Recovery and Resilience Facility, a €577 billion program created during the pandemic. He says the program showed that supranational institutions can change under pressure, while noting that evaluators have identified delays and complex controls.
The analysis says institutions perform three key functions during periods of uncertainty: they steady expectations, spread the costs of shocks more fairly and allow governments to adjust when earlier assumptions fail. Konstantinakos argues that these functions depend on public trust and political legitimacy.
He also cites the IMF’s April 2026 outlook, which warns that political pressure on independent central banks and policy bodies can weaken public confidence, raise inflation expectations and reduce growth. Konstantinakos links Europe’s post-Great Recession populist surge partly to institutions that many citizens came to see as failing them.
The conclusion is practical rather than predictive: countries cannot know the next shock in detail, but they can build systems that absorb damage. Konstantinakos argues that inclusive institutions, predictable rules and broad participation in public choices amount to a form of insurance against an uncertain future.
This story draws on original reporting from Phys.org.